Amendments to the Construction Business Act of Japan
1. An introduction to the Japanese construction market
The Japanese construction market has been very active in recent years. The property price index for both commercial and residential real estate has risen every year, according to a public announcement made by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Domestic construction companies are not the only ones capitalising on this trend; overseas construction companies are also looking into opportunities for development projects in Japan.
The Construction Business Act of Japan (Act) requires companies and individuals who intend to operate a construction business to obtain a construction business license. The Act also requires parties to have a construction contract in place and to follow certain general rules when concluding and performing a construction contract.
Japan amended the Act in June 2024. Some new rules under the amendments have already come into effect, while others will become effective within 18 months from June 2024 pursuant to the supplementary provisions of the Act. The amendments are regarding (i) improving the treatment and working conditions of construction workers, (ii) preventing the reduction of labor costs due to rising material costs (in order to keep the original construction fee including labor and material costs despite rising material costs) and (iii) work style reform and improving work productivity. The amendments may have profound impacts on the construction and real estate industries. As such, all parties to a construction contract should be aware of and prepare for the amendments.
2. An overview of the Construction Business Act
As explained, in general1, companies who intend to operate a construction business must obtain a construction business license. There are two classifications of the construction business license – the “ordinary (ippan) construction business license” and the “special (tokutei) construction business license”. Companies who are the principal contractors (motouke) directly engaged by the project owners and who subcontract (i) for the general building work, JPY80 million or more or (ii) for other work, JPY50 million or more, must obtain a special construction business license. Otherwise, an ordinary construction business license will suffice.
If a construction company has office(s) in only one prefecture, a prefectural license must be obtained, whereas if a construction company has offices in multiple prefectures, a national license must be obtained from the MLIT. Please note that a prefectural license does not restrict the company's ability to conduct its construction business outside of that particular prefecture.
There are 29 different categories of construction business licenses, of which two are “general” (isshiki) licenses (i.e., the general civil work license and general building work license) and the other 27 are “specific” licenses. Companies need to apply for the right type(s) of construction business licenses in accordance with the nature of the work they anticipate operating.
A construction business license will expire in five (5) years, if not renewed.
3. 2024 Amendments to the Construction Business Act
3.1 Background
It is generally considered that in the construction industry, wages are low and working hours are long in comparison with other industries, which makes recruitment difficult.
In order to address this issue, amendments to the Act were enacted. There are three (3) pillars in the amendments below.
1) Improving the treatment and working conditions of construction workers
- An obligation on the companies who accept construction work orders (Contractors) to make efforts to improve the working conditions of construction workers.
- The Central Council for Construction Business (Council) has the authority to set the “labor expenses standards” and issue recommendations based on the standards.
- Prohibition of requests for construction fee estimates or quotes at a significantly low amount.
- It is the responsibility not only of the companies who order construction work (Contractee), but also of the Contractor to not conclude a construction contract including a construction fee whose amount is below an amount generally necessary to complete the construction work.
2) Preventing the reduction of labor costs due to rising material costs
- An obligation on Contractors to inform Contractees of any risks that may affect the construction period or fee (if such risk were to become a reality).
- Contractees and Contractors must incorporate in a construction contract procedures to discuss and amend the construction period or fee in the case of a significant shortage of principal materials, a significant rise in material costs, etc. which would affect the construction period or fee.
- In the case of a significant shortage of principal materials, a significant rise in material costs, etc., at the request of the Contractor pursuant to the construction contract, the Contractee must make efforts to discuss in good faith with the Contractor for amendments to the construction period or fee.
3) Work style reform and improving work productivity
- It is the responsibility not only of the Contractee but also of the Contractor to not conclude a construction contract including a construction period significantly shorter than a period generally necessary to complete the construction.
- Ease the requirements and streamline the process relating to the assignment of an engineer or engineers at the construction site by effectively utilising information and communication technology (ICT).
- The national government is to prepare guidelines on Contractors' construction site management, e.g., by effectively utilising ICT.
- Streamline the obligation to prepare and submit work ledgers for public work, e.g., by effectively utilising ICT.
3.2 Key Takeaways
1) Improving the treatment and working conditions of construction workers
The Council is situated within the MLIT in order to preside over matters related to the Construction Business Act, etc. The Council will prepare the labor cost standards pursuant to the amended Act.
Contractors must make an effort to provide a written fee estimate for the construction work which includes material costs. Under the amended Act, both requests for, and provisions of a fee estimate that is significantly below the fee generally required to complete the construction work is prohibited. If a Contractee violates this rule, the MLIT or the prefecture who granted the construction business license to the Contractor may issue necessary recommendations to the Contractee. If the Contractee fails to follow such recommendations, the MLIT or the prefecture may disclose the Contractee's name to the public by including it on the list of violators.
Contractors must not conclude a construction contract at a fee that is lower than the fee generally necessary to complete the construction work. There are a few justifiable exceptions to this rule, such as if the Contractor is able to use its own inventories or resources at discounted prices.
2) Preventing reduction of labor costs due to rising material costs
If a Contractor identifies any risks that could affect the construction period or fee, it must inform the Contractee before concluding the construction contract. Reasonable negotiations between the parties to address these potential risks are required before concluding the construction contract.
In the case of public construction work, if there is a significant shortage of principal materials, a significant rise in the material costs, etc., the Contractor may request to discuss amendments to the construction period, fee, etc. pursuant to the amended Act for Promoting Proper Tendering and Contracting for Public Works. The Contractee (the relevant national or local government) must discuss in good faith with the Contractor for amendments to the construction period, fee, etc.
3) Work style reform and improving work productivity
Under the Act before the amendments, Contractees must not conclude a construction contract including a construction period which is significantly shorter than the period generally necessary to complete the construction work. Under the amended Act, in addition to Contractees, Contractors are also prohibited from concluding a construction contract including a construction period which is significantly shorter than the period generally necessary to complete the construction work. This amendment is expected to further prevent a construction period which is unreasonably short, and to lead to better treatment of construction workers.
Under the Act before the amendments, for certain significant construction work related to public facilities or buildings, or facilities or buildings visited by a large number of people, a full-time on-site engineer (shunin-gijutsusha or kanri-gijutsusha) must be assigned to each construction site by the Contractor. Under the amended Act, a concurrent office of an on-site engineer at multiple construction sites is allowed if (i) the construction fee does not exceed JPY100 million for non-general building work or JPY200 million for general building work, (ii) the number of the construction sites supervised concurrently by the same on-site engineer does not exceed two (2), (iii) an on-site engineer holding a concurrent office at multiple construction sites is able to easily travel from one site to the other (i.e., the travel time is generally less than two (2) hours), (iv) there are no more than three (3) layers of subcontracting including the layer between the Contractor and its direct subcontractor(s), (v) a person to liaise with the on-site engineer is assigned at each of the construction sites, (vi) remote supervision of the construction site and work arrangement thereat is possible by utilising ICT, and (vii) a personnel allocation plan is prepared for each of the construction sites. Under the amended Act, a concurrent office of an on-site engineer (for one (1) construction site only) and an in-office engineer (eigyosho-gijutsusha) is also allowed under similar conditions as stated above.
If you have any questions about how these amendments may affect your company, please contact the authors of this article.
1Companies who only undertake “minor construction work”provided for by the Cabinet Order (i.e., (i) for the general building work (kenchiku isshiki koji), work whose amount (for a single construction project) is less than JPY15 million and (ii) for other work, work whose amount (for a single construction project) is less than JPY5 million) are not required to obtain a construction business license.
